Court cans cover under liability policy - Exclusion clauses enforced in appeal on product defect claimJan 2014 |
The Full Federal Court recently considered the viability of a claim by a manufacturer pursuing a recovery action for product defect losses involving several parties within the supply chain in the matter of Siegwerk Australia Pty Ltd (in liquidation) v Nuplex Industries (Aust) Pty Ltd  FCAFC 130.
The respondent to this appeal (Nuplex) had supplied a resin which was used by the applicant (Siegwerk) to manufacture a lacquer. Visy Packaging Pty Ltd (Visy) manufactured ring pull cans with the lacquer applied inside to prevent corrosion caused by the contents, being tuna with vinaigrette. The cans of tuna were sold under the John West brand but corrosion of the cans led to two product recalls which resulted in multi-million dollar losses.
John West initially pursued a claim for its losses against Visy, who settled the claim as well as a claim brought against it by the canner who filled the cans. Visy sought to recover against Siegwerk, who subsequently settled the claim brought against it.
In turn, Siegwerk sued Nuplex for the loss, who sought to defend the claim at trial as well as claiming cover under its insurance policy held with QBE. Coverage was refused based on policy exclusions.
The appeal before the Full Court of the Federal Court involved consideration of two issues - whether Siegwerk's claim against Nuplex should succeed, and whether QBE should cover Nuplex for the claim and its costs.
At trial, it was determined that Nuplex was not liable to Siegwerk for the losses arising out of the defective cans.
The question was determined to be one of causation - that is, whether Nuplex's breach of its contract with Siegwerk caused the corrosion of the cans.
This was not a straightforward question. The breach of contract claim was advanced on the basis that Nuplex had substituted an ingredient in the resin, which was not allowed by the contract with Siegwerk. However, evidence was led that the substitution coincided with Visy's decision that the lacquer should be less viscous. There was also an, albeit less contemporaneous, change of another ingredient in the lacquer around eighteen months prior to the problem with the cans. Those events were described by the court as having 'muddied the waters'.
Detailed expert evidence was led by Siegwerk in an effort to demonstrate a direct causal link between the ingredient substituted by Nuplex and the consequent viscosity of the lacquer which, it was argued, resulted in the lacquer being more brittle and more likely to fail. The trial judge did not accept that the theory led by the expert demonstrated causation.
Siegwerk appealed the decision on the basis that the trial judge had made an error in fact by finding that the substituted ingredient had not lowered the molecular weight of the lacquer or that this action caused the lacquer to be more brittle and more likely to fail.
The trial judge had determined that the evidence led by each party's expert was insufficient to support Siegwerk's allegations. On appeal, the court accepted Siegwork's argument that a simple conclusion in favour of one expert over another without reasoning was inadequate. In the absence of reasons, the appeal court was unable to determine the correct conclusion and considered any effort to do so would be pure speculation. The matter was therefore remitted for a new trial on the question of causation.
At trial, QBE was ordered to indemnify Nuplex for the costs of the claim by Siegwerk.
QBE appealed that decision and the Full Federal Court considered the appeal both in relation to indemnity under the policy in respect of any liability Nuplex may have to Seigwerk (in the event Siegwerk succeeds on retrial) but also regarding Nuplex's costs and other expenses incurred in defending the claim against it.
Nuplex held a broadform liability policy with QBE. It was accepted at trial that Siegwerk's claim sought damages for property damage as the cans were physically damaged by corrosion. It was accepted that the concept of property damage extended to the loss of use of tangible property which was not physically damaged but such loss of use was caused by physical damage to other tangible property, so coverage should extend to that part of the claim relating to cans which had not corroded but were recalled.
It was further accepted that the claim constituted an occurrence which was in connection with Nuplex's business on the basis that the event was the failure of the lacquer and the composition of the resin in breach of Nuplex's obligations to Siegwerk.
QBE pursued several grounds of appeal. Its objection to the claim constituting an occurrence under the policy on the basis that there was no 'event' which resulted in the property damage was unsuccessful. Similarly, QBE's argument that Nuplex's liability was in respect of economic loss as opposed to property damage also failed.
The policy contained an exclusion for liability resulting from the failure of Nuplex's products. At trial, the judge found that the exclusion arose, but did not apply in this case as the loss of use of the property was due to sudden and accidental physical damage to Nuplex's products after they were used by another party. The Full Federal Court did not agree with that reasoning as there was no sudden and accidental physical damage to Nuplex's resin after it had been used by others. A distinction was drawn between damage to the lacquer, as distinct from Nuplex's resin, in the scoring process carried out by Visy. This was found not to fit within the proviso to the exclusion in the QBE policy.
As a result, the policy exclusion applied to coverage otherwise potentially available to Nuplex.
A further successful ground of appeal by QBE arose out of the product recall exclusion in the policy. At trial, the judge distinguished between claims for the loss of value of the property recalled and other costs and expenses associated with the recall. On appeal, the Full Federal Court determined that the exclusion is directed to a loss of the value of the property itself as well as the expenses associated with withdrawing the product from the market or from use.
As a further matter of appeal, QBE challenged the trial judge's conclusions as to the 'active malfunctioning' endorsement in the policy. QBE argued that Nuplex was required to demonstrate that the property damage resulted from the failure of the resin to function in its normal manner (for which it was designed) and that such failure was active.
QBE argued that the trial judge erred in finding that the resin failed to function in its normal manner, having confused the lacquer with the resin. The Full Federal Court concluded that the property damage may have resulted from the failure of the resin to perform the function or serve the purpose intended by Nuplex, but did not fail to function in its normal manner for which it was designed. The endorsement therefore did not arise so the exclusion remained in force.
In any event, even if that conclusion was found to be incorrect, the Full Federal Court determined that it was not established that the resin acted to cause property damage from its failure to function in the manner for which it was designed.
Therefore, on appeal, the related exclusion was found to apply and QBE succeeded on that point.
As a result, QBE's appeal was allowed. Although the matter of costs was left open for written submissions by the parties, the Full Federal Court tended towards a view that Nuplex should pay QBE's costs of the appeal and of the trial.
This decision reinforces the importance of critically reviewing each term of the policy to ensure its proper application to the circumstances of each case, which often turn on their own facts.
Various factual scenarios may appear to provide prima facie coverage, with exclusions and endorsements still requiring detailed consideration.
The intention of the policy and nature of coverage generally provided are relevant indications as to the potential outcome of a claim for indemnity.